Arthur Andersen continued its desperate race against the clock yesterday, as the firm’s partners agreed to meet with Paul Volcker on his rescue plan.

But the firm was handed a dose of bad news when New Jersey regulators told Atlantic City casinos that they could no longer use Andersen as an auditor. Harrah’s Entertainment and other Atlantic City casinos were among Andersen’s biggest clients.

And late yesterday, Andersen released a statement saying it would cut an unspecified number of jobs.

After Volcker expressed frustration within Andersen headquarters that the partners were not backing his plan to save the company, a group of key partners called to assure him of their support, according to one source familiar with the discussions.

The partners told Volcker they will back his proposal to split the firm in two, with accounting on one side and tax and consulting business on the other side.

Volcker intends to meet personally with a group of partners before the end of this week “to determine how to get this rebuilding plan moving forward,” the source said.

The firm wants the Justice Department to withdraw its criminal indictment, which still seems unlikely, according to legal sources.

“There’s no way the DOJ will withdraw the indictment,” said one lawyer, who is representing Enron shareholders in a class-action lawsuit against the bankrupt energy giant and Andersen, its former auditor.

Meanwhile, Andersen continues to lose clients rapidly – suggesting that its chances for survival are not good, even if it can cut a deal with the DOJ.

Yesterday, Sysco Corp. dumped Andersen in favor of Ernst & Young. The six Andersen casino clients who will have to change auditors because of the New Jersey Gaming Commission vote are Harrah’s, Showboat, Sands Hotel & Casino and the three Trump Hotels & Casinos Resorts’ casinos.

Prosecutors are expected in court today to respond to a filing by Andersen lawyers. Andersen has asked a judge to stop federal prosecutors from using the grand jury to bolster its document-destruction case in advance of the auditor’s upcoming obstruction of justice trial.

The motion argues prosecutors are trying to get an unfair advantage by subpoenaing Andersen employees to gather information for the trial, set for May 6.

Established law and the Justice Department’s usual practice prohibit prosecutors from using a grand jury to collect more information on a defendant that has already been indicted, said Robert Mintz, a former federal prosecutor.

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Andersen watch

Time is running out for embattled Arthur Andersen. The latest developments:

* A frustrated Paul Volcker finally started talks with partners to gain their support for his plan to split the company in two.